People with employer-provided health insurance receive a substantial tax saving because this benefit is not taxed as income. On the other hand, people who buy their own insurance must do so with after-tax dollars. There are proposals in both the House and Senate to remedy this inequity through refundable tax credits for those who buy their own health insurance. (A refundable credit is one that is paid regardless of whether the recipient paid that much in taxes.) Both George W. Bush and Al Gore endorsed the idea during the presidential campaign, and members of Congress as politically diverse as Democrat Pete Stark and Republican Dick Armey support some version of it. Most of the proposals suggest a credit of about $1,000 for an individual and $2,500 for a family.
Would a refundable tax credit prompt the uninsured to buy a policy? Two new studies released in September examine the impact refundable tax credits might have on the uninsured who are potential buyers of individual policies. Both use the online insurance broker eHealthInsurance to capture possible premium rates and both assume a refundable tax credit of $1,000 for an individual policy. Everything else about the two studies differs: the methodology, the authors, the scholarship and the media hype. One is a scholarly work, the other a political tract that contends that many of the uninsured would get little or no help. Yet, the inescapable conclusion drawn from both is that a $1,000 refundable tax credit would have a profound effect on lowering the numbers of uninsured in the United States.
The Scholarly Study.
"Tax Credits, the Distribution of Subsidized Health Insurance Premiums and the Uninsured," a study by economists Mark Pauly and David Song of the University of Pennsylvania and Bradley Herring of Yale University, was published and released without much fanfare by the National Bureau of Economic Research (NBER) as working paper 8457 (available at http://www.nber.org/papers/w8457).
Unlike previous works by the authors and other scholars, the NBER study does not estimate purchasing decisions based on a premium that is the average of all the available premiums. Instead, it notes that, "no rational purchaser who has obtained price quotes would choose to pay the average or median price. Rather, the buyer would pay the lowest price (or something close to it)." The authors also reject the idea that premiums can be judged as "affordable" or "unaffordable" based solely on the income of the purchaser. The value of the expected benefit must be considered as well. For that reason, people with higher health risks would be more likely to purchase coverage, or pay more for it, than would a low-risk individual with the same income.
The NBER study uses a sample population from the Community Tracking Study conducted every two years by the Center for Studying Health System Change to estimate how people would respond to a $1,000 tax credit, given their income, location, sex, age and smoking behavior. It then compares these populations to the premiums available online for a policy with no more than a $1,000 deductible. It found that premium data were nonexistent or limited in nine states that have adopted community-rating laws requiring that all policy holders be charged the same premium regardless of their health status, and eliminating or compressing age-based premiums. Still, as the figure shows, using one methodology the study found that, with a $1,000 tax credit:
- As many as 85 percent of the uninsured would buy health insurance with a $1,000 deductible, a 20 percent coinsurance requirement and a $2,000 limit on out-of-pocket spending.
- More than 25 percent of the uninsured could get the policy without paying anything beyond the tax credit.
- Another 25 percent would have to pay no more than $168 a year beyond the tax credit.
Using different assumptions, the study finds that between 50 percent and 75 percent of the uninsured population could purchase individual coverage for free with a $1,000 tax credit if they chose from the 10 percent of policies with the lowest available premiums. Even the lowest 25 percent of available premiums would be free to at least one-quarter of the uninsured, with half of the uninsured paying no more than $252 a year in addition to the tax credit.
The Political Tract.
The other September study (available at: http://www.familiesusa.org) was released at a press conference by FamiliesUSA, a liberal advocacy group. Called "A 10-Foot Rope for a 40-Foot Hole," this report does not give the names of any authors and is clearly intended as a political document rather than a serious attempt to advance understanding. In fact, every element of it is chosen for calculated political effect. For instance:
- The study only looks at 25 states, including six of the community-rating states with little or no data.
- It only considers what insurance policy a 25-year-old woman and a 55-year-old woman could obtain.
- Rather than testing what people might actually purchase, it only looks at the most popular plan offered to federal employees – a Blue Cross Blue Shield plan with a $250 deductible and minimal copayments for doctors' visits and prescription drugs – and called anything less generous "substandard."
The FamiliesUSA study examines what benefits can be purchased for the $1,000 tax credit and how much the premium is for what it describes as a "standard" plan. Among the conclusions:
- "$1,000 plans are not always available for healthy, non-smoking, 25-year-old women." But it found that they could get coverage for $1,000 in all but six states, five of which are community-rating states, where the market is in chaos.
- "$1,000 plans for healthy, non-smoking 25-year-olds in the states where they are available are substandard." This is another way of saying one can't buy the federal Blue Cross Blue Shield plan in the individual market for $1,000 a year – not surprising since the federal premium for this plan is $3,142 a year.
- "Standard health insurance plans are not always available for healthy, non-smoking, 25 year-old (or 55-year old) women." It cites four states, three of them community-rating states, which have very few options left.
What FamiliesUSA actually found is that health insurance is more affordable for younger people than for older people, and that younger people could purchase good coverage for $1,000 per year in almost all the states. This is very useful information, since most of the uninsured are young. According to the Census Bureau, out of a total uninsured population of 38.7 million, 30.7 million (79 percent) are under 45 years old. This actually supports the conclusion of the Pauly study that something approaching 85 percent of the uninsured would be able to purchase coverage with a $1,000 tax credit.
Conclusion.
Even though the FamiliesUSA study is intended to demonstrate that the $1,000 tax credit is a bad idea, it actually confirms that the credit would enable a large number of currently uninsured people to purchase health insurance with little or no out-of-pocket cost. The insurance one can buy with a tax credit would not be as generous or as comprehensive as most employer plans, but both studies find that it could attract large numbers of those who are now uninsured. The only states where the tax credit apparently would have little impact would be states with community-rating laws.
Greg Scandlen is a Senior Fellow in Health Policy with the National Center for Policy Analysis.